Weaker Growth & Prices May Pressure Vols & Margins

• Wilmar International (SGX:F34)’s 1H22 PAT (excluding one-offs) beat Street and was in-line with MIBG. Growth was primarily driven by higher upstream palm oil prices, where downside risks to ASPs are increasing. Concurrently, downstream demand and margin recovery may take longer in a backdrop of recession and prolonged Chinese lockdowns.
• We lower target price for Wilmar to S$4.47 from S$6.56 and downgrade Wilmar to HOLD. We see limited near-term catalysts for re-rating.

CPO Price Driven Growth Likely to Moderate

• We estimate 70% of 1H22 y-o-y PBT growth was from higher CPO prices in the Plantations & Sugar Milling segment. Improving supply conditions, better outlook for substitutes & potential flow of Indonesian inventories (which is in oversupply domestically), could dampen prices going forward.
• MIBG expects average CPO prices to retreat -32% y-o-y in 2023E. Even after such a price fall, CPO prices would be still be higher than the past 8-years (barring 2021).
• In the current inflationary backdrop this may drive demand destruction. We have lowered 2022-24E segment volumes by 21-27%.

Downstream Prospects Face Recession, Slower China

• Typically, Wilmar’s integrated business model would offset upstream margin squeeze with downstream expansion. However, in the current backdrop of recession, inflation and prolonged lockdowns in China, upside here may be limited, in our view.
• Management claims that in Food Products, ASP increases have not kept pace with rising input costs. 1H22 PBT/ton here fell 22% y-o-y after excluding the one-off gains from the Adani Wilmar IPO. The industrial oriented Tropical Oils segment saw volumes fall 9% y-o-y.
• While Management claims that crush margins are improving from their bottoms, demand growth is slow. Indeed, crush capacity utilisation is just over 50%. With significant uncertainty around China’s eventual re-opening plus regional markets and Europe facing slowdown and recessions, our adjustments to volumes and margins lowers 2022-24E NPAT by 1-11%.

Downgrade Wilmar to HOLD

• We roll forward our valuations to 2023E. Our blended DCF-based target price for Wilmar (WACC 5.3%, 1% terminal growth) and peer P/E (target P/E 29x vs 24x after mark-to-market valuations) have been lowered to S$4.47 from S$6.56.
• We have lowered the peer weighting in our blend to 10% (~ 20%) given the massive discount Wilmar trades to its own listed parts elsewhere.

• We see limited catalysts for Wilmar to re-rate until better clarity on Chinese re-opening and global growth comes.
• Downgrade Wilmar to HOLD.
• Prefer Bumitama Agri (SGX:P8Z) from a strong output outlook, valuations and yield.

Source: Maybank Research - 5 Aug 2022